Educational Articles

An Introduction To Hydroelectric Alternative Energy Plays

Bryan Fong
| June 27, 2011

Hydropower has been helping make life easier for man for a few thousand years. It can be traced back as far as the Greeks, who used water wheels to grind wheat into flour. Fast forward a couple thousand years to the mid-1700s, and Bernard Forest De Belidor described the use of machines to create hydroelectricity from falling water in his book L’Archtecture Hydraulique. The technology was continually developed over the next 100 plus years. Then, in the early 1880s, direct-current electric generation was used in Grand Rapids, Michigan and Niagara Falls, New York to power theaters, store fronts, street lights, and a flour mill. The world’s first hydroelectric plant was created on the Fox River, in Appleton Wisconsin, in 1882, when an electric generator was used in conjunction with a water powered turbine. Over the next forty years, the technology was further refined and put into use in many different locations. In fact, by 1920, hydropower accounted for roughly 25% of United States electric generation. Over the years, until present day, this form of energy grew in popularity. However, at this point, more traditional or conventional energy plays have taken hold, and hydro only represents about 10% of current U.S. electricity production.

Hydroelectricity can take many forms. The most conventional type is known as impoundment hydropower, where a dam is used to block the natural flow of tributary water. As electricity is needed, water above the dam can be released down a chute where it rotates a turbine connected to an electric generator. The quantity of water flow can be adjusted to account for peak and non-peak electricity usage patterns, so that excess power is not wasted. Run-of-the-river plants are also used on natural tributaries. These are less invasive and can be set up with little or no obstruction of water flow. Underground hydroelectric facilities take advantage of natural vertical drops. In areas like waterfalls, or steep streams coming down from a mountain, a hole can be drilled into the ground to supply a turbine, and the exhaust hatch of that turbine reintroduces the water back into its natural flow downstream. Tidal generators can also be used, but only certain locations have tides with strong enough currents to make this application economically viable. Finally, pumped-storage generator sites are probably the most adaptable, because they are largely man made. This also makes them more costly, and less preferable to other options. With this situation a holding facility gets filled with water, during peak power usage times the water is run through the turbines to generate power. Then, at night, when electric rates are lower, the water reserve is refilled to await the next day’s operations. In essence, this can be viewed as an arbitrage opportunity that takes advantage of the spread on electricity rates from peak usage to non-peak usage.

For obvious reasons, the least invasive approach is preferable when determining the appropriate hydropower setup to be used at any location. While the impoundment facility can often times produce the greatest quantity and/or most efficient energy, large dams can pose their own problems. For instance, in some situations, fish ladders are being utilized so that species like salmon can migrate back up to spawning grounds. In a few locations, the new salmon spawn are having higher mortality rates as they make their trek back to the ocean and inevitably through the hydro turbines, despite their designs to be fish friendly.

In some situations, nature doesn’t supply the large reservoirs needed to power the hydroelectric facility. To create these, large areas upstream from the plant may be submerged under water, thus resulting in a loss of usable land. In fact, this may be a more serious problem than originally anticipated. All of the plant life and trees that are submerged begin to rot, and in doing so, they decompose and produce methane gas, which then escapes into the atmosphere, the release of which may be more hazardous to the environment than the CO2 produced from more traditional electric generators such as natural gas and coal. At the moment, there are some studies going on to determine just how much pollution is being released from these types of applications, but it is still unclear what the findings will show. Although these are caveats to hydroelectric power plants, all forms of energy generation have some drawbacks.

Advantages to hydropower facilities include independence from commodity pricing. Other forms of electric generators like natural gas and coal-fired plants are somewhat at the mercy of rising commodity costs, and profits can be hurt accordingly, unless the operator of the plant can pass on the rising costs to their customers. Even if that is possible, higher prices will result in customer conservation and lower electric consumption. As commodity costs continue to rise, as they have been recently, hydropower plants may become increasingly popular. At the moment, some countries already generate the bulk of their electric needs from hydroelectric generators. For example, Norway produces 98%-99% of its energy consumption in this manner; it has plans to be carbon neutral by the year 2030. It is important to note that Norway is one of the world’s largest exporters of gas and oil, so even though they may not be generating a large carbon footprint at home, they are indirectly profiting from fossil fuel usage, which still increase global greenhouse gas levels.

All told, hydroelectric power still affords a clean, green, alternative energy source, and in its best forms it releases much less pollution into the atmosphere. For investors looking to gain access to this space, the options are somewhat limited. Some of the largest offerings are government owned, others are private companies. Nonetheless, a few public options for stocks that focus mainly on hydroelectric power generation do exist, for example: Brookfield Renewable Power Fund (BRC.UN), China HydroelectricCorp. (CHC), National Hydropower Corp. (BOM: 533098), Innergex Renewable Energy Inc. (TSE: INE), and Jaiprakash Power Ventures (BOM:533098). For a potential mixed play that focuses on hydro, more traditional generation, and regulated utility offerings, Emera Inc. (EMA) may fit the bill. Finally, Alstrom (ALO), ABB Group (ABB), Harbin Power Equipment Co. Ltd. (HKG:1133), General Electric (GE - Free General Electric Stock Report), and Siemens (SI) all have some exposure to this space. These companies have worked together to design and manufacture the 26 turbines used at the Three Gorges Dam on the Yangtze River, in China. This is currently the largest capacity hydroelectric power plant in the world. Investors should note that many of the public hydro offerings are thinly traded, and may not be suitable for conservative accounts. Still, for risk-tolerant investors, a few of these plays could give nice exposure to the space and afford a good dividend yield.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.